treasury management strategy statement and investment...

Appendix 6

South Northamptonshire Council

Treasury Management Strategy Statement

2017/18

Contents:

1. Introduction 2

2. External Context 2

3. Local Context 4

4. Borrowing Strategy 5

5. Investment Strategy 6

6. Treasury Management Indicators 9

7. Other Items 10

- Policy on use of financial derivatives

- investment training

- investment advisers

- investment of money borrowed in advance of need

Appendices:

Appendix A - Economic & Interest Rate Forecast 12

Appendix B - Prudential Indicators 14

Appendix C - Minimum Revenue Provision (MRP) Statement 17

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1. Introduction

1.1 In February 2013 the Authority adopted the Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public Services: Code of Practice 2011 Edition (the CIPFA Code) which requires the Authority to approve a treasury management strategy before the start of each financial year.

1.2 In addition, the Department for Communities and Local Government (CLG) issued revised Guidance on Local Authority Investments in March 2010 that requires the Authority to approve an investment strategy before the start of each financial year.

1.3 This report fulfils the Authority’s legal obligation under the Local Government Act 2003 to have regard to both the CIPFA Code and the CLG Guidance.

1.4 The Authority has invested substantial sums of money and is therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. The successful identification, monitoring and control of risk are therefore central to the Authority’s treasury management strategy.

1.5 Revised strategy: In accordance with the CLG Guidance, the Authority will be asked to approve a revised Treasury Management Strategy Statement should the assumptions on which this report is based change significantly. Such circumstances would include, for example, a large unexpected change in interest rates, or in the Authority’s capital programme or in the level of its investment balance.

2. External Context

2.1 Economic background: The major external influence on the Authority’s treasury

management strategy for 2017/18 will be the UK’s progress in negotiating a smooth

exit from the European Union. Financial markets, wrong-footed by the referendum

outcome, have since been weighed down by uncertainty over whether leaving the

Union also means leaving the single market. Negotiations are expected to start once

the UK formally triggers exit in early 2017 and last for at least two years. Uncertainty

over future economic prospects will therefore remain throughout 2017/18.

The fall and continuing weakness in sterling and the near doubling in the price of oil

in 2016 have combined to drive inflation expectations higher. The Bank of England is

forecasting that Consumer Price Inflation will breach its 2% target in 2017, the first

time since late 2013, but the Bank is expected to look through inflation overshoots

over the course of 2017 when setting interest rates so as to avoid derailing the

economy.

Initial post-referendum economic data showed that the feared collapse in business

and consumer confidence had not immediately led to lower GDP growth. However,

the prospect of a leaving the single market has dented business confidence and

resulted in a delay in new business investment and, unless counteracted by higher

public spending or retail sales, will weaken economic growth in 2017/18.

Looking overseas, with the US economy and its labour market showing steady

improvement, the market has priced in a high probability of the Federal Reserve

increasing interest rates in December 2016. The Eurozone meanwhile has continued

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to struggle with very low inflation and lack of momentum in growth, and the European

Central Bank has left the door open for further quantitative easing.

The impact of political risk on financial markets remains significant over the next

year. With challenges such as immigration, the rise of populist, anti-establishment

parties and negative interest rates resulting in savers being paid nothing for their

frugal efforts or even penalised for them, the outcomes of Italy’s referendum on its

constitution (December 2016), the French presidential and general elections (April –

June 2017) and the German federal elections (August – October 2017) have the

potential for upsets, as the outcome of Italy’s referendum on its constitution in

December 2016 has shown.

2.2 Credit outlook: Markets have expressed concern over the financial viability of a

number of European banks recently. Sluggish economies and continuing fines for

pre-crisis behaviour have weighed on bank profits, and any future slowdown will

exacerbate concerns in this regard.

Bail-in legislation, which ensures that large investors including local authorities will

rescue failing banks instead of taxpayers in the future, has now been fully

implemented in the European Union, Switzerland and USA, while Australia and

Canada are progressing with their own plans. The credit risk associated with making

unsecured bank deposits has therefore increased relative to the risk of other

investment options available to the Authority; returns from cash deposits however

continue to fall.

2.3 Interest rate forecast: The Authority’s treasury adviser Arlingclose’s central case is

for UK Bank Rate to remain at 0.25% during 2017/18. The Bank of England has,

however, highlighted that excessive levels of inflation will not be tolerated for

sustained periods. Given this view and the current inflation outlook, further falls in the

Bank Rate look less likely. Negative Bank Rate is currently perceived by some

policymakers to be counterproductive but, although a low probability, cannot be

entirely ruled out in the medium term, particularly if the UK enters recession as a

result of concerns over leaving the European Union.

Gilt yields have risen sharply, but remain at low levels. The Arlingclose central case

is for yields to decline when the government triggers Article 50. Long-term economic

fundamentals remain weak, and the quantitative easing (QE) stimulus provided by

central banks globally has only delayed the fallout from the build-up of public and

private sector debt. The Bank of England has defended QE as a monetary policy

tool, and further QE in support of the UK economy in 2017/18 remains a possibility,

to keep long-term interest rates low.

A more detailed economic and interest rate forecast provided by Arlingclose is

attached at Appendix A.

2.4 For the purpose of setting the budget, it has been assumed that new investments will

be made at an average rate of 0.41%.

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3. Local Context

3.1 On 31st December 2016, the Authority had no borrowing and held £36.5m of

investments.

3.2 The underlying need to borrow for capital purposes is measured by the Capital

Financing Requirement (CFR), while usable reserves and working capital are the

underlying resources available for investment. The Authority’s current strategy is to

maintain borrowing and investments below their underlying levels, sometimes known

as internal borrowing.

The Authority is currently debt free and its capital expenditure plans do not currently

imply any need to borrow over the forecast period. Investments are forecast to fall as

capital receipts are used to finance capital expenditure and reserves are used to

finance the revenue budget.

CIPFA’s Prudential Code for Capital Finance in Local Authorities recommends that

the Authority’s total debt should be lower than its highest forecast CFR over the next

three years. The Authority expects to comply with this recommendation during

2017/18.

4. Borrowing Strategy

4.1 The Authority is currently debt free and does not expect to need to borrow in

2017/18, or the subsequent 2 years. The Authority may however borrow to pre-fund

future years’ requirements, providing this does not exceed the authorised limit for

borrowing of £6.5 million, although this is not expected to occur in the next 3 years.

4.2 Objectives: The Authority’s chief objective when borrowing money is to strike an

appropriately low risk balance between securing low interest costs and achieving

certainty of those costs over the period for which funds are required. The flexibility to

renegotiate loans should the Authority’s long-term plans change is a secondary

objective.

4.3 Strategy: Given the significant cuts to public expenditure and in particular to local

government funding, the Authority’s borrowing strategy continues to address the key

issue of affordability without compromising the longer-term stability of the debt

portfolio. With short-term interest rates currently much lower than long-term rates, it

is likely to be more cost effective in the short-term to either use internal resources, or

to borrow short-term loans instead.

By doing so, the Authority is able to reduce net borrowing costs (despite foregone

investment income) and reduce overall treasury risk. The benefits of internal / short-

term borrowing will be monitored regularly against the potential for incurring

additional costs by deferring borrowing into future years when long-term borrowing

rates are forecast to rise. Arlingclose will assist the Authority with this ‘cost of carry’

and breakeven analysis. Its output may determine whether the Authority borrows

sums at long-term fixed rates in 2017/18 with a view to keeping future interest costs

low, even if this causes additional cost in the short-term.

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Alternatively, the Authority may arrange forward starting loans during 2017/18, where

the interest rate is fixed in advance, but the cash is received in later years. This

would enable certainty of cost to be achieved without suffering a cost of carry in the

intervening period.

In addition, the Authority may borrow short-term loans to cover unplanned cash flow

shortages.

4.4 Sources: The approved sources of long-term and short-term borrowing are:

• Public Works Loan Board (PWLB) and any successor body

• any institution approved for investments (see below)

• any other bank or building society authorised to operate in the UK

• UK public and private sector pension funds (except NCC Pension Fund)

• capital market bond investors

• UK Municipal Bonds Agency plc and other special purpose companies created to

enable local authority bond issues

In addition, capital finance may be raised by the following methods that are not

borrowing, but may be classed as other debt liabilities:

• operating and finance leases

• hire purchase

• Private Finance Initiative

• sale and leaseback

The Authority will investigate other sources of finance other than PWLB, such as

local authority loans and bank loans, that may be available at more favourable rates.

Municipal Bond Agency: UK Municipal Bonds Agency plc was established in 2014

by the Local Government Association as an alternative to the PWLB. It plans to

issue bonds on the capital markets and lend the proceeds to local authorities. This

will be a more complicated source of finance than the PWLB for two reasons:

borrowing authorities will be required to provide bond investors with a joint and

several guarantee to refund their investment in the event that the agency is unable to

for any reason; and there will be a lead time of several months between committing

to borrow and knowing the interest rate payable. Any decision to borrow from the

Agency will therefore be the subject of a separate report to Council.

Short-term and Variable Rate loans: These loans leave the Authority exposed to

the risk of short-term interest rate rises and are therefore subject to the limit on the

net exposure to variable interest rates in the treasury management indicators below.

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5. Annual Investment Strategy

5.1 The Authority holds significant invested funds, representing income received in

advance of expenditure plus balances and reserves held. In the past 12 months, the

Authority’s investment balance has ranged between £27.0 and £43.4 million.

5.2 Objectives: Both the CIPFA Code and the CLG Guidance require the Authority to

invest its funds prudently, and to have regard to the security and liquidity of its

investments before seeking the highest rate of return, or yield. The Authority’s

objective when investing money is to strike an appropriate balance between risk and

return, minimising the risk of incurring losses from defaults and the risk of receiving

unsuitably low investment income. Where balances are expected to be invested for

more than one year, the Authority will aim to achieve a total return that is equal or

higher than the prevailing rate of inflation, in order to maintain the spending power of

the sum invested.

5.3 Negative Interest Rates: If the UK enters into a recession in 2017/18, there is a

small chance that the Bank of England could set its Bank Rate at or below zero,

which is likely to feed through to negative interest rates on all low risk, short-term

investment options. This situation already exists in many other European countries.

In this event, security will be measured as receiving the contractually agreed amount

at maturity, even though this may be less than the amount originally invested.

5.4 Strategy: Given the increasing risk and falling returns from short-term unsecured

bank investments, the Authority aims to diversify into more secure and/or higher

yielding asset classes during 2017/18. This is especially the case for amounts that

are available for longer-term investment. All of the Authority’s surplus cash is

currently invested in short-term unsecured bank deposits, certificates of deposit and

money market funds.

5.5 Specified and non-specified investments

Specified Investments: The CLG Guidance defines specified investments as those:

• denominated in pound sterling,

• due to be repaid within 12 months of arrangement,

• not defined as capital expenditure by legislation, and

• invested with one of:

o the UK Government,

o a UK local authority, parish council or community council, or

o a body or investment scheme of “high credit quality”.

The Authority defines “high credit quality” organisations and securities as those

having a credit rating of A- or higher that are domiciled in the UK or a foreign country

with a sovereign rating of AA+ or higher. For money market funds and other pooled

funds “high credit quality” is defined as those having a credit rating of A- or higher.

Non-specified Investments: Any investment not meeting the definition of a specified

investment is classed as non-specified. The Authority does not intend to make any

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investments denominated in foreign currencies. Non-specified investments will

therefore be limited to long-term investments, i.e. those that are due to mature 12

months or longer from the date of arrangement, and investments with bodies and

schemes not meeting the definition on high credit quality. The Authority may only

have a maximum of 50% of its investment portfolio in non-specified investments.

5.6 Approved Counterparties: The Authority may invest its surplus funds with any of

the counterparty types in the table below, subject to the limits shown.

Investment Specified limit Non-Specified limit

Banks – Unsecured £3m per bank

£3m per bank

Banks – Secured £5m per bank £5m per bank

Government £5m n/a

Corporates £3m per corp £3m per corp

Registered Providers £5m per RP £5m per RP

Pooled Funds £10m per fund £10 m per fund

Investments with other organisations*** n/a £5m

*** Subject to an external credit assessment and specific advice from Arlingclose

Banks Unsecured: Accounts, deposits, certificates of deposit and senior unsecured

bonds with banks and building societies, other than multilateral development banks.

These investments are subject to the risk of credit loss via a bail-in should the

regulator determine that the bank is failing or likely to fail.

Banks Secured: Covered bonds, reverse repurchase agreements and other

collateralised arrangements with banks and building societies. These investments

are secured on the bank’s assets, which limits the potential losses in the unlikely

event of insolvency, and means that they are exempt from bail-in. Where there is no

investment specific credit rating, but the collateral upon which the investment is

secured has a credit rating, the higher of the collateral credit rating and the

counterparty credit rating will be used to determine cash and time limits. The

combined secured and unsecured investments in any one bank will not exceed the

cash limit for secured investments.

Government: Loans, bonds and bills issued or guaranteed by national governments,

regional and local authorities and multilateral development banks. These investments

are not subject to bail-in, and there is an insignificant risk of insolvency. Investments

with the UK Central Government may be made in unlimited amounts for up to 50

years.

Corporates: Loans, bonds and commercial paper issued by companies other than

banks and registered providers. These investments are not subject to bail-in, but are

exposed to the risk of the company going insolvent. Loans to unrated companies will

only be made as part of a diversified pool in order to spread the risk widely.

Registered Providers: Loans and bonds issued by, guaranteed by or secured on

the assets of Registered Providers of Social Housing, formerly known as Housing

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Associations. These bodies are tightly regulated by the Homes and Communities

Agency and, as providers of public services, they retain the likelihood of receiving

government support if needed.

Pooled Funds: Shares in diversified investment vehicles consisting of the any of the

above investment types, plus equity shares and property. These funds have the

advantage of providing wide diversification of investment risks, coupled with the

services of a professional fund manager in return for a fee. Short-term Money

Market Funds that offer same-day liquidity and very low or no volatility will be used in

conjunction with instant access bank accounts, while pooled funds whose value

changes with market prices and/or have a notice period will be used for longer

investment periods.

Bond, equity and property funds offer enhanced returns over the longer term, but are

more volatile in the short term. These allow the Authority to diversify into asset

classes other than cash without the need to own and manage the underlying

investments. Because these funds have no defined maturity date, but are available

for withdrawal after a notice period, their performance and continued suitability in

meeting the Authority’s investment objectives will be monitored regularly.

Investments with other organisations: This would include investment opportunities

with small and medium sized enterprises (SMEs) and other businesses across the

UK. Because of the higher perceived credit risk of SMEs, such investments may

provide considerably higher rates of return. An external credit assessment will be

undertaken and advice from Arlingclose will be sought (where available) before any

investment decision is made.

Authority’s Banker: The Authority banks with NatWest Bank (part of the RBS

Group). At the current time, it does not meet the minimum credit criteria of A- (or

equivalent) long-term (It has a rating of BBB+). Although the credit-rating has fallen

below the Authority’s minimum criteria, NatWest will, when appropriate, continue to

be used for short term liquidity requirements (overnight and weekend investments)

and business continuity arrangements.

5.7 Risk assessment and Credit Ratings: Investment limits are set by reference to the

lowest published long-term credit rating from Fitch, Moody’s or Standard & Poor’s.

Where available, the credit rating relevant to the specific investment or class of

investment is used, otherwise the counterparty credit rating is used. However,

investment decisions are never made solely based on credit ratings, and all other

relevant factors including external advice will be taken into account. Credit ratings

are obtained and monitored by the Authority’s treasury advisers, who will notify

changes in ratings as they occur.

The Authority understands that credit ratings are good, but not perfect, predictors of

investment default. Full regard will therefore be given to other available information

on the credit quality of the organisations in which it invests, including credit default

swap prices, financial statements, information on potential government support and

reports in the quality financial press. No investments will be made with an

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organisation if there are substantive doubts about its credit quality, even though it

may meet the credit rating criteria.

The Authority will at all times carefully consider advice from Arlingclose regarding the

quality of any institution and proposed value and duration of deposit before making

any investment.

5.8 Liquidity Management: The Authority uses internal cash flow forecasting methods

to determine the maximum period for which funds may prudently be committed. The

forecast is compiled on a prudent basis to minimise the risk of the Authority being

forced to borrow on unfavourable terms to meet its financial commitments. Limits on

long-term investments are set by reference to the Authority’s medium term financial

plan and cash flow forecast.

6. Treasury Management Indicators

The Authority measures and manages its exposures to treasury management risks

using the following indicators.

6.1 Interest Rate Exposures: This indicator is set to control the Authority’s exposure to

interest rate risk. The upper limits on fixed and variable rate interest rate exposures,

expressed as the proportion of net interest payable will be:

2017/18 2018/19 2019/20

Upper limit on fixed interest rate exposure 100% 100% 100%

Upper limit on variable interest rate exposure 100% 100% 100%

Fixed rate investments and borrowings are those where the rate of interest is fixed

for at least 12 months, measured from the start of the financial year or the transaction

date if later. All other instruments are classed as variable rate.

6.2 Maturity Structure of Borrowing: This indicator is set to control the Authority’s

exposure to refinancing risk. The upper and lower limits on the maturity structure of

fixed rate borrowing will be:

Upper Lower

Under 12 months 100% 0%

12 months and within 24 months 100% 0%

24 months and within 5 years 100% 0%

5 years and within 10 years 100% 0%

10 years and above 100% 0%

As the Authority is debt free, the upper and lower limits as shown above provide the

scope to accommodate new loan(s) in the most appropriate maturity band at the time

of borrowing.

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6.3 Principal Sums Invested for Periods Longer than 364 days: The purpose of this

indicator is to control the Authority’s exposure to the risk of incurring losses by

seeking early repayment of its investments. The limits on the long-term principal sum

invested to final maturities beyond the period end will be:

2017/18 2018/19 2019/20

Limit on principal invested beyond year end £7m £7m £7m

7. Other Items

There are a number of additional items that the Authority is obliged by CIPFA or CLG

to include in its Treasury Management Strategy.

7.1 Policy on Use of Financial Derivatives: Local authorities have previously made

use of financial derivatives embedded into loans and investments both to reduce

interest rate risk (e.g. interest rate collars and forward deals) and to reduce costs or

increase income at the expense of greater risk (e.g. LOBO loans and callable

deposits). The general power of competence in Section 1 of the Localism Act 2011

removes much of the uncertainty over local authorities’ use of standalone financial

derivatives (i.e. those that are not embedded into a loan or investment).

The Authority will only use standalone financial derivatives (such as swaps, forwards,

futures and options) where they can be clearly demonstrated to reduce the overall

level of the financial risks that the Authority is exposed to. Additional risks presented,

such as credit exposure to derivative counterparties, will be taken into account when

determining the overall level of risk. Embedded derivatives, including those present in

pooled funds and forward starting transactions, will not be subject to this policy,

although the risks they present will be managed in line with the overall treasury risk

management strategy.

Financial derivative transactions may be arranged with any organisation that meets

the approved investment criteria. The current value of any amount due from a

derivative counterparty will count against the counterparty credit limit and the relevant

foreign country limit.

7.2 Investment Training: The needs of the Authority’s treasury management staff for

training in investment management are continually assessed as part of the staff

appraisal process, and additionally when the responsibilities of individual members of

staff change.

Staff regularly attend training courses, seminars and conferences provided by

Arlingclose and other relevant providers.

7.3 Investment Advisers: The Authority has appointed Arlingclose Limited as treasury

management advisers and receives specific advice on investment, debt and capital

finance issues.

7.4 Investment of Money Borrowed in Advance of Need: The Authority may, from

time to time, borrow in advance of need, where this is expected to provide the best

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long term value for money. Since amounts borrowed will be invested until spent, the

Authority is aware that it will be exposed to the risk of loss of the borrowed sums, and

the risk that investment and borrowing interest rates may change in the intervening

period. These risks will be managed as part of the Authority’s overall management of

its treasury risks.

The total amount borrowed will not exceed the authorised borrowing limit of £7

million. The maximum period between borrowing and expenditure is expected to be

two years, although the Authority is not required to link particular loans with particular

items of expenditure.

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Appendix A – Arlingclose Economic & Interest Rate Forecast - November 2016

Underlying assumptions:

The medium term outlook for the UK economy is dominated by the negotiations to

leave the EU. The long-term position of the UK economy will be largely dependent on

the agreements the government is able to secure with the EU and other countries.

The global environment is also riddled with uncertainty, with repercussions for

financial market volatility and long-term interest rates. Donald Trump’s victory in the

US general election and Brexit are symptomatic of the popular disaffection with

globalisation trends. The potential rise in protectionism could dampen global growth

prospects and therefore inflation. Financial market volatility will remain the norm for

some time.

However, following significant global fiscal and monetary stimulus, the short term

outlook for the global economy is somewhat brighter than earlier in the year. US

fiscal stimulus is also a possibility following Trump’s victory.

Recent data present a more positive picture for the post-Referendum UK economy

than predicted due to continued strong household spending.

Over the medium term, economic and political uncertainty will likely dampen

investment intentions and tighten credit availability, prompting lower activity levels

and potentially a rise in unemployment.

The currency-led rise in CPI inflation (currently 1.0% year/year) will continue,

breaching the target in 2017, which will act to slow real growth in household spending

due to a sharp decline in real wage growth.

The depreciation in sterling will, however, assist the economy to rebalance away

from spending. The negative contribution from net trade to GDP growth is likely to

diminish, largely due to weaker domestic demand. Export volumes will increase

marginally.

Given the pressure on household spending and business investment, the rise in

inflation is highly unlikely to prompt monetary tightening by the Bank of England, with

policymakers looking through import-led CPI spikes to the negative effects of Brexit

on economic activity and, ultimately, inflation.

Bank of England policymakers have, however, highlighted that excessive levels of

inflation will not be tolerated for sustained periods. Given this view and the current

inflation outlook, further monetary loosening looks less likely..

Forecast:

Globally, the outlook is uncertain and risks remain weighted to the downside. The

UK domestic outlook is uncertain, but likely to be weaker in the short term than

previously expected.

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The likely path for Bank Rate is weighted to the downside. The Arlingclose central

case is for Bank Rate to remain at 0.25%, but there is a 25% possibility of a drop to

close to zero, with a very small chance of a reduction below zero.

Gilt yields have risen sharply, but remain at low levels. The Arlingclose central case

is for yields to decline when the government triggers Article 50.

Dec-16

Mar-17

Jun-17

Sep-17

Dec-17

Mar-18

Jun-18

Sep-18

Dec-18

Mar-19

Jun-19

Sep-19

Dec-19

Average

Official Bank Rate

Upside risk 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.25 0.25 0.25 0.25 0.25 0.12

Arlingclose Central Case 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

Downside risk 0.25 0.25 0.25 0.25 0.25 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.40

3-month LIBID rate

Upside risk 0.05 0.05 0.10 0.10 0.10 0.15 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.18


Downside risk 0.20 0.25 0.25 0.25 0.30 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.34

1-yr LIBID rate

Upside risk 0.10 0.10 0.15 0.15 0.15 0.20 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.23


Downside risk 0.10 0.15 0.15 0.15 0.20 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.24

5-yr gilt yield

Upside risk 0.25 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.39


Downside risk 0.30 0.45 0.45 0.45 0.45 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.47

10-yr gilt yield

Upside risk 0.30 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.39


Downside risk 0.30 0.45 0.45 0.45 0.45 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.47

20-yr gilt yield

Upside risk 0.25 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.39


Downside risk 0.40 0.55 0.55 0.55 0.55 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.57

50-yr gilt yield

Upside risk 0.25 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.39


Downside risk 0.40 0.55 0.55 0.55 0.55 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.57

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Appendix B - Prudential Indicators 2017/18

The Local Government Act 2003 requires the Authority to have regard to the Chartered

Institute of Public Finance and Accountancy’s Prudential Code for Capital Finance in Local

Authorities (the Prudential Code) when determining how much money it can afford to borrow.

The objectives of the Prudential Code are to ensure, within a clear framework, that the

capital investment plans of local authorities are affordable, prudent and sustainable, and that

treasury management decisions are taken in accordance with good professional practice. To

demonstrate that the Authority has fulfilled these objectives, the Prudential Code sets out the

following indicators that must be set and monitored each year.

Estimates of Capital Expenditure: The Authority’s planned capital expenditure and

financing may be summarised as follows.

Capital Expenditure and

Financing

2016/17

Revised

£m

2017/18

Estimate

£m

2018/19

Estimate

£m

2019/20

Estimate

£m

Total Expenditure 6.9 4.7 1.4 1.3

Capital Receipts 5.4 1.2 1.2 1.0

Government Grants &

Business Rates 0 0 0 0

Reserves 0 0 0 0

Revenue 0 0 0 0

Borrowing (external) 0 0 0 0

Borrowing (internal) 1.5 3.5 0.2 0.3

Leasing and PFI 0 0 0 0

Total Financing 6.9 4.7 1.4 1.3

Estimates of Capital Financing Requirement: The Capital Financing Requirement

(CFR) measures the Authority’s underlying need to borrow for a capital purpose.

Capital Financing

Requirement

31.03.17

Revised

£m

31.03.18

Estimate

£m

31.03.19

Estimate

£m

31.03.20

Estimate

£m

Total CFR -1.6 -5.1 -5.3 -5.6

The CFR is forecast to remain negative for the next three years as financing remains in

excess of capital expenditure.

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Gross Debt and the Capital Financing Requirement: In order to ensure that over the

medium term debt will only be for a capital purpose, the Authority should ensure that debt

does not, except in the short term, exceed the total of capital financing requirement in the

preceding year plus the estimates of any additional capital financing requirement for the

current and next two financial years. This is a key indicator of prudence.

Debt

31.03.17

Revised

£m

31.03.18

Estimate

£m

31.03.19

Estimate

£m

31.03.20

Estimate

£m

Borrowing 0 0 0 0

Finance leases 0 0 0 0

PFI liabilities 0 0 0 0

Transferred debt 0 0 0 0

Total Debt 0 0 0 0

Total debt is expected to remain below the CFR during the forecast period.

Operational Boundary for External Debt: The operational boundary is based on the

Authority’s estimate of most likely (i.e. prudent but not worst case) scenario for external debt.

It links directly to the Authority’s estimates of capital expenditure, the capital financing

requirement and cash flow requirements, and is a key management tool for in-year

monitoring. Other long-term liabilities comprise finance lease, Private Finance Initiative and

other liabilities that are not borrowing but form part of the Authority’s debt.

Operational Boundary

2016/17

Revised

£m

2017/18

Estimate

£m

2018/19

Estimate

£m

2019/20

Estimate

£m

Borrowing 4.0 4.0 4.0 4.0

Other long-term liabilities 0.5 0.5 0.5 0.5

Total Debt 4.5 4.5 4.5 4.5

Authorised Limit for External Debt: The authorised limit is the affordable borrowing limit

determined in compliance with the Local Government Act 2003. It is the maximum amount of

debt that the Authority can legally owe. The authorised limit provides headroom over and

above the operational boundary for unusual cash movements.

Authorised Limit

2016/17

Limit

£m

2017/18

Limit

£m

2018/19

Limit

£m

2019/20

Limit

£m

Borrowing 6.5 6.5 6.5 6.5

Other long-term liabilities 0.5 0.5 0.5 0.5

Total Debt 7.0 7.0 7.0 7.0

16

Ratio of Financing Costs to Net Revenue Stream: This is an indicator of affordability and

highlights the revenue implications of existing and proposed capital expenditure by

identifying the proportion of the revenue budget required to meet financing costs, net of

investment income.

2016/17

Revised

%

2017/18

Estimate

%

2018/19

Estimate

%

2019/20

Estimate

%

Ratio of Financing

Costs to Net Revenue

Stream

0 0 0 0

Incremental Impact of Capital Investment Decisions: This is an indicator of affordability

that shows the impact of capital investment decisions on Council Tax levels. The incremental

impact is the difference between the total revenue budget requirement of the current

approved capital programme and the revenue budget requirement arising from the capital

programme proposed earlier in this report.

Incremental Impact of Capital

Investment Decisions

2017/18

Estimate

£

2018/19

Estimate

£

2019/20

Estimate

£

General Fund - increase in annual

band D Council Tax 0 0 0

The council’s capital plans, as estimated in forthcoming financial years, have a neutral

impact on council tax. This reflects the fact that capital expenditure is predominantly

financed from internal resources (grants, contributions, revenue and capital receipts) and

that any increase in the underlying need to borrow is supported through the Revenue

Support Grant system.

Adoption of the CIPFA Treasury Management Code: The Authority adopted the

Chartered Institute of Public Finance and Accountancy’s Treasury Management in the Public

Services: Code of Practice 2011 Edition in February 2013. It fully complies with the Codes

recommendations.

17

Appendix C – Annual Minimum Revenue Provision Statement 2017/18

Where the Authority finances capital expenditure by debt, it must put aside resources to

repay that debt in later years. The amount charged to the revenue budget for the repayment

of debt is known as Minimum Revenue Provision (MRP), although there has been no

statutory minimum since 2008. The Local Government Act 2003 requires the Authority to

have regard to the Department for Communities and Local Government’s Guidance on

Minimum Revenue Provision (the CLG Guidance) most recently issued in 2012.

The broad aim of the CLG Guidance is to ensure that debt is repaid over a period that is

either reasonably commensurate with that over which the capital expenditure provides

benefits, or, in the case of borrowing supported by Government Revenue Support Grant,

reasonably commensurate with the period implicit in the determination of that grant.

The CLG Guidance requires the Authority to approve an Annual MRP Statement each year,

and recommends a number of options for calculating a prudent amount of MRP. The

following statement incorporates options recommended in the Guidance as well as locally

determined prudent methods.

The Authority expects that its Capital Financing Requirement will be nil/negative on

31st March 2017 and in line with the CLG Guidance it will therefore charge no MRP

in 2017/18.

For capital expenditure loans to third parties that are repaid in annual or more

frequent instalments of principal, the Council will make nil MRP, but will instead apply

the capital receipts arising from principal repayments to reduce the capital financing

requirement instead. In years where there is no principal repayment, MRP will be

charged in accordance with the MRP policy for the assets funded by the loan,

including where appropriate, delaying MRP until the year after the assets become

operational.

Capital expenditure incurred during 2017/18 will not be subject to a MRP charge until

2018/19.

Based on the Authority’s latest estimate of its Capital Financing Requirement on 31st March

2017, the budget for MRP has been set as follows:

31.03.2017

Estimated CFR

£m

2017/18

Estimated

MRP

£

Total 0 0

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